Nabil Abu Rudeina, a Palestinian Authority spokesman, told the AFP news agency: "This is a dangerous decision and will hinder the negotiations."
The Israeli anti-settlement group Peace Now condemned the new project, saying it would "widen the gap with the Palestinians and the two-state solution, which risks becoming obsolete".
According to Israel's Haaretz newspaper, some 50,000 housing units are reported to be in various stages of planning and approval on occupied land in East Jerusalem.
Haaretz says plans for around 20,000 apartments are already in an advanced stage.
A spokesman for the Israeli interior ministry said: "The Jerusalem District Planning Committee today approved a plan which has been in the works for over three years.
"This is a procedural stage in the framework of a long process that will yet continue for some time. The committee meeting was determined in advance and there is no connection to US Vice-President Joe Biden's visit to Israel."
There are still various planning hurdles for the East Jerusalem project to clear, and work is not thought likely to start for at least another two years.
Under pressure from the US, Israel has agreed a 10-month suspension of new building in the West Bank. However, the moratorium excludes East Jerusalem, where the Palestinians want as the capital of their future state.
Israel's continued expansion of settlements is one of the biggest obstacles to the resumption of peace talks with the Palestinians, now suspended for more than a year despite months of US-led shuttle diplomacy.
Source: Al Jazeera and agencies